Investors should avoid panicking over single data points and instead look at the broader trends and free their portfolios from strong biases, according to Tom Hibbert, multi-asset strategist at Canaccord.
On 5 August, the VIX index, nicknamed the Fear Index, spiked to its highest point since the Covid pandemic, to collapse back down right after to levels that indicate “complete complacency”.
These spikes in fear are based on “surprising economic data that can distract away” from the broader trends and from investing altogether. This is detrimental because the current backdrop is “quite good” for markets, according to the strategist.
While he admits economic growth is going to slow down, it's slowing from a “very high” starting point, and “a little bit of the heat” coming out of the economy could spark “a broader market rally” – especially if the soft-landing scenario materialises (which is Hibbert’s “marginal” base case, as he recently told Trustnet).
“The market has panicked and then recovered, and it's doing that on every single data point. But there's data points every single day, so it’s important to not get drawn into a single surprise and look at the broader trends,” he said.
The most recent trigger of everyone's worries has been the US labour market, which “undoubtedly has been weakening quickly”. But the evidence of worse things to come – the broader trend – is not there yet.
Investors should watch the data in the coming weeks and months but only start to become concerned if US labour market weakness continues. “That's a sign that we are heading into a more significant downturn”, he said.
“Between now and the fourth quarter of the year, we will get quite a lot of insights of the state of the labour market, enough to determine whether the weakness that we've seen so far is related to seasonality factors, some other intricacies going on under the bonnet, or whether it does point to a more significant weakness”.
“But a non-severe slowdown in the economy isn't necessarily a bad thing for financial markets.”
This is not to say that there are not risks about – in fact risk premia are “skinny”, credit spreads are narrow and equity markets are “quite expensive in aggregate”, although “there are opportunities in parts of the market”, Hibbert said.
After keeping a level head and not panicking when markets panic, the other thing to do is to be able to adapt portfolios and to remain flexible, said Hibbert. To achieve that in the Canaccord multi-asset portfolios, he is avoiding “any massive biases”.
“We're balanced because the macro environment is uncertain. But the main point is that we have a quality focus because, in an uncertain macro environment, quality is the factor that will outperform,” he said.
On top of quality names, he is also allocating to some recovery plays that will outperform in a soft-landing scenario.
“In an environment where there isn't a severe recession but we get some interest rate cuts, those areas that are undervalued, as well as some of the more cyclical sectors, could really recover.”
One of them is the UK market and particularly small- and mid-caps, which are trading “very cheaply” relative to the domestic market and the global market as well. Other thematic plays include infrastructure and utilities, which can perform “quite well” in that environment.
Finally, interest rate cuts “should grow corporate earnings (as shown in the corporate results season) and support bond markets where yields are sensible” while at the same time preventing major issues in equity markets, where valuations are “broadly fair”.
“Recent market turbulence is a clear indicator that the summers are never quiet, but are not a reason for us to completely shift our views and portfolio positioning,” Hibbert concluded.